What is a buy-and-sell agreement?
Is a buy-and-sell agreement legally binding in South Africa?
“the Commissioner is satisfied that the policy was taken out or acquired by a person who on the date of death of the deceased was a partner of the deceased, or held any share or like interest in a company in which the deceased on that date held any share or like interest, for the purpose of enabling that person to acquire the whole or part of— (aa) the deceased’s interest in the partnership concerned; or (bb) the deceased’s share or like interest in that company and any claim by the deceased against that company, and that no premium on the policy was paid or borne by the deceased”
“A person must disregard any capital gain or capital loss determined in respect of a disposal that resulted in the receipt by or accrual to that person of an amount— … (c) in respect of a policy that was taken out to insure against the death, disability or illness of that person by any other person who was a partner of that person, or held any shares or similar interest in a company in which that person held any share or similar interest, for the purpose of enabling that other person to acquire, upon the death, disability or illness of that person, the whole or part of— (i) that person’s interest in the partnership concerned; or (ii) that person’s share or similar interest in that company and any claim by that person against that company, and no premium on the policy was paid or borne by that person while that other person was the beneficial owner of the policy.”
“Subject to subsection (6), a company must enter in its securities register every transfer of any certificated securities … A company may make an entry contemplated in subsection (5) only if the transfer— (a) is evidenced by a proper instrument of transfer that has been delivered to the company; or (b) was effected by operation of law.”
“There must be levied and paid for the benefit of the National Revenue Fund a tax, to be known as the securities transfer tax, in respect of— (a) every transfer of any security issued by— (i) a close corporation or company incorporated, established or formed inside the Republic … at the rate of 0,25 per cent of the taxable amount of that security determined in terms of this Act. … The taxable amount in respect of every transfer of an unlisted security is— (a) the amount or market value of the consideration given or, where no consideration is given or the consideration given is less than the market value of that security, the market value of that security.”
When you need a Buy-and-Sell
- You co-own a private company, close corporation or partnership with one or more other people, and you want certainty that if a co-owner dies or becomes permanently disabled, the business will continue smoothly and their share will be bought out at a fair, pre-agreed price rather than fought over.
- You do not want the deceased co-owner’s spouse, children or heirs to inherit the shares and become your involuntary business partners — a buy-and-sell ensures the interest is bought back by the surviving owners instead of passing into the estate and on to the family.
- The deceased owner’s family needs liquidity. Without funding, the estate may hold valuable but unsellable shares and no cash; the life-policy proceeds give the heirs a fair cash price and the survivors a funded, ready buyout.
- You want to take advantage of the estate duty and capital gains tax reliefs — under section 3(3)(a)(iA) of the Estate Duty Act and paragraph 55 of the Eighth Schedule — which require the policies, premiums and agreement to be structured precisely so the deceased never owns the policy or pays its premiums.
- You are setting up or formalising a business with co-founders and want a complete owner-exit framework alongside your shareholders agreement, covering death and disability now, while everyone is healthy and insurable and the terms can be agreed without conflict.
- A bank, investor or co-owner requires business-continuity cover so that the loss of a key owner does not destabilise the company, its loan covenants or its supplier and customer relationships.
What a Buy-and-Sell should contain
The parties and the business interest
Identify each owner who is a party, the company, close corporation or partnership concerned, and the exact interest each holds (number and class of shares, percentage of members’ interest, or partnership share). The agreement binds all co-owners reciprocally — each is both a potential buyer of the others’ interests and a potential seller of their own.
Trigger events (death and disability)
Define precisely what events activate the buy-and-sell obligation — almost always death, and usually permanent or total disability, and sometimes dread/critical illness or retirement. The clause should state when the obligation arises, how the event is proved (death certificate, medical certification of disability), and that the buyout is then compulsory, not optional, for both sides.
The obligation to buy and to sell
The heart of the agreement: on a trigger event the surviving owners are obliged to buy, and the affected owner or their deceased estate is obliged to sell, the relevant interest. Set out how the interest is apportioned among multiple survivors (usually pro rata to their existing holdings) so control and value are preserved as intended.
Valuation of the interest
Fix how the purchase price is determined — a stated rand value reviewed annually, a formula (for example a multiple of profit or net asset value), or an independent valuation by a nominated valuer or the company’s auditors. A clear, regularly-updated valuation is critical: an out-of-date or vague price is the most common cause of dispute between survivors and the deceased’s family.
Policy funding and ownership structure
Specify the life and disability policies that fund the buyout — who owns each policy, whose life is insured, who pays the premiums, and the sum assured matched to the valuation. To secure the estate duty and CGT reliefs, each co-owner must own the policy on the others’ lives and pay its premiums, and the insured owner must never own or pay for the policy on their own life.
Estate duty and tax-structuring terms
Record that the structure is intended to satisfy section 3(3)(a)(iA) of the Estate Duty Act and paragraph 55 of the Eighth Schedule — co-ownership at the date of death, the purpose of acquiring the deceased’s interest, and no premium paid or borne by the deceased — and deal with the 0,25% securities transfer tax and any capital gains tax on the seller’s side so the parties’ tax positions are clear.
Application of policy proceeds and shortfall / surplus
Set out that the survivors apply the policy proceeds to pay the agreed price to the estate, and provide for the gap if the proceeds and the valuation do not match — a top-up from the buyers if the policy underpays, and what happens to any surplus if the proceeds exceed the price (commonly it stays with the policy owner or is paid over by agreement).
Transfer mechanics, completion and the securities register
Detail how the interest is delivered: signed securities transfer forms, surrender of the deceased’s share certificate, executor’s authority, and the company’s obligation to enter the transfer in its securities register under section 51 of the Companies Act so the survivors become the registered holders. Tie in any pre-emptive rights in the MOI or shareholders agreement.
Buy-and-sell agreement vs shareholders agreement in South Africa
| Feature | Buy-and-sell agreement | Shareholders agreement |
|---|---|---|
| Main purpose | Compulsory buyout of an owner’s interest on death or disability | Governs the ongoing running of the company between living owners |
| When it operates | On a trigger event — death, permanent disability (sometimes illness/retirement) | Throughout the life of the company, day to day |
| Funding | Funded by life/disability policies the owners hold on each other | No insurance funding; deals with capital, dividends, decisions |
| Key tax angle | Estate duty (s 3(3)(a)(iA)) and CGT (para 55) exemption of policy proceeds | Securities transfer tax and CGT on ordinary share dealings |
| Who is protected | The deceased’s family (cash) and the survivors (control) | All shareholders’ governance, voting and pre-emption rights |
| Relationship | Can be a standalone contract or built into the shareholders agreement | The broader owners’ contract that a buy-and-sell can sit within |
Common South African pitfalls
- Letting the wrong person own or pay for the policy. The estate duty exemption in section 3(3)(a)(iA) and the CGT disregard in paragraph 55 apply only if the policy is owned by a co-shareholder or partner of the deceased, is taken out to acquire the deceased’s interest, and the deceased never paid or bore the premiums. If the deceased owned the policy on their own life or paid its premiums, the proceeds fall back into the dutiable estate — the single most expensive mistake in buy-and-sell planning.
- An out-of-date or missing valuation. If the agreed price is stale, vague, or far below the real worth of the business, the deceased’s family may dispute it or the survivors may overpay. Valuations must be set on a clear formula or independent basis and reviewed regularly (at least annually) so the policy cover and the buyout price stay aligned.
- A mismatch between cover and value. If the sum assured is less than the share value, the survivors must find the shortfall in cash; if it is more, there is a surplus to deal with. As the business grows, the policy cover must be increased to track the valuation, or the agreement leaves the buyer underfunded exactly when liquidity is needed most.
- Confusing the buy-and-sell with the shareholders agreement, or contradicting it. Pre-emptive rights, transfer restrictions and valuation methods in the MOI or shareholders agreement must line up with the buy-and-sell, otherwise the compulsory buyout can clash with an existing right of first refusal and the transfer can be challenged.
- Forgetting the share-transfer completion and securities transfer tax. The buyout obligation is contractual, but the survivors only become registered owners once the company enters the transfer in its securities register under section 51 of the Companies Act, against a proper instrument of transfer and the deceased’s certificate — and 0,25% securities transfer tax is payable to SARS. Leaving the register and STT unattended leaves the survivors without registered title.
- No disability or illness trigger. Many agreements cover only death and ignore permanent disability or critical illness, even though a disabled co-owner can be just as disruptive to the business. Without a disability trigger and matching disability cover, there is no funded exit for an owner who survives but can no longer participate.
Frequently asked questions
What is the difference between a buy-and-sell agreement and a shareholders agreement?
A shareholders agreement governs how living co-owners run the company day to day — voting, dividends, funding, deadlock and pre-emptive rights. A buy-and-sell agreement deals specifically with what happens to an owner’s shares on death or permanent disability: it obliges the survivors to buy and the affected owner or their estate to sell, funded by life policies. The two work together, and a buy-and-sell is often built into, or referenced by, the shareholders agreement.
How is a buy-and-sell agreement funded in South Africa?
Almost always by life and disability insurance. Each co-owner takes out a policy on the lives of the other owners, with the sum assured matched to each owner’s share value. When a co-owner dies or becomes disabled, the surviving owners receive the policy proceeds and use that cash to pay the deceased’s estate (or the disabled owner) the agreed price for their interest, so the buyout is fully funded without the survivors having to find the money themselves.
Are the policy proceeds exempt from estate duty?
They can be. Under proviso (iA) to section 3(3)(a) of the Estate Duty Act 45 of 1955, the proceeds of a policy on the deceased’s life are not deemed property in the deceased’s estate if SARS is satisfied that the policy was taken out by a co-shareholder, co-member or partner of the deceased, for the purpose of acquiring the deceased’s interest, and that no premium was paid or borne by the deceased. Meet those three conditions and the buyout proceeds escape estate duty.
What happens if the deceased paid the premiums on the policy?
The estate duty exemption is lost. Proviso (iA) requires that no premium on the policy was paid or borne by the deceased. If the deceased owned the policy on their own life, or paid or contributed to its premiums, the proceeds become deemed property in the deceased’s estate and are subject to estate duty (and the matching capital gains tax disregard is also lost). This is why the policy ownership and premium-payer must be structured correctly from the outset and never altered casually.
Is there capital gains tax on the policy payout?
Not where the buy-and-sell is correctly structured. Paragraph 55 of the Eighth Schedule to the Income Tax Act 58 of 1962 disregards the capital gain on a long-term policy taken out by a partner or co-shareholder to acquire the deceased’s business interest, on the same conditions as the estate duty exemption — co-ownership, the acquisition purpose, and no premium paid by the deceased. If the conditions are not met, the payout can attract CGT, so the structuring matters for both taxes.
Does a buy-and-sell agreement cover disability, not just death?
It should. A well-drafted buy-and-sell covers permanent or total disability (and sometimes critical illness or retirement) as trigger events alongside death, funded by disability cover as well as life cover. A co-owner who is permanently disabled but still alive can disrupt the business just as much as a deceased one, so without a disability trigger and matching cover, there is no funded way to buy that owner out and replace them.
How is the price of the shares decided?
By the valuation clause in the agreement. The price is usually fixed as a stated value reviewed annually, a formula (such as a multiple of profit or net asset value), or an independent valuation by a nominated valuer or the company’s auditors. The valuation must be kept current and the policy cover updated to match it, otherwise the survivors either underpay the family or face a cash shortfall when the buyout is triggered.
Can a buy-and-sell agreement be part of our shareholders agreement?
Yes. The buy-and-sell terms can be a standalone contract or incorporated as a section of the shareholders agreement — both are valid. What matters is that the buyout obligation, valuation, trigger events and policy-funding terms are consistent with the rest of the shareholders agreement and the company’s Memorandum of Incorporation, particularly any pre-emptive rights, so the compulsory buyout does not clash with an existing right of first refusal.
Sources & authority
- Estate Duty Act 45 of 1955, s 3(3)(a) provisos (ii) & (iA) (life-policy deemed property and the buy-and-sell exemption)
- Income Tax Act 58 of 1962, Eighth Schedule para 55 (disregard of capital gain on a life policy)
- Companies Act 71 of 2008, s 51 (registration and transfer of certificated securities)
- Securities Transfer Tax Act 25 of 2007, ss 2 & 6 (levy and taxable amount of STT on the buyout transfer)
This guide is general information, not legal advice. It reflects the law as at June 2026.